Credit Risks Can Get Cards Too--for a Price

Some credit card issuers, digging for gold in the growing mounds of tarnished credit and bankruptcies, are issuing cards to some of the worst credit risks--sometimes charging hundreds of dollars in fees.

Consumer groups are worried that many families with already burdensome finances will be enticed to take on more debt just to pay for a new card.

“We’ve begun to see more and more of these offers, and we suspect this is an area that’s going to grow,” said Ruth Susswein, executive director of Bankcard Holders of America in McLean, Va. “But be aware that these offers can be very costly and may be a bad deal, although they’re certainly not going to be pitched that way.”

Until recently, people with credit problems could only get cards if they put up enough money to at least cover their credit limit.

The new products aren’t secured, but holders are required to make an upfront payment or pay special fees over time. These fees can sometimes be considerable, and, unlike a secured account, they don’t earn interest.

AmCredit in Sioux Falls, S.D., buys debts that others have given up on, for pennies on the dollar. Through a 5,000-card pilot program launched in May, it asks people who have already been through bankruptcy to repay all or a portion of their old debt. In exchange, AmCredit will extend a modest line of new credit, typically 10% of what the bankrupt person agrees to pay back.

Susswein says the offer isn’t a good deal. Anybody who has been through bankruptcy has already had the debts wiped out.

“Don’t assume debt that is already not yours to pay,” she said.

Martin Burke, vice chairman of Service One, which markets and services the AmCredit program, said the AmCredit cards offer “an opportunity for people to take advantage of one of their old obligations to reestablish themselves as credible.”

Some creditors don’t want to lend money to people who have had only secured cards, because they don’t demonstrate that someone can actually pay back a loan, Burke said. Cardholders do not pay an initial fee, but they pay a 6.9% annual rate for the six months and 18.99% thereafter.

First Premier Bank in Sioux Falls offers loans from $250 to $1,000, for which consumers pay a $49 upfront processing fee, an additional $89 to join the program, plus an annual fee of $89. Of the total $227 initial cost, $178 can be paid over time, but that counts against the cardholder’s credit limit. Cardholders pay a 21% annual rate.

Bill Connor, vice president for new business at First Premier, said some customers don’t want a secured credit card because they incorrectly perceive that a merchant accepting the card for payment can tell it is secured, or because they have a hard time raising the security deposit.

First Premier, which piloted about 105,000 unsecured cards three months ago, also offers several secured products, Connor said.

Susswein thinks a secured card is a better deal for people with spotty credit.

Although the deposits for such cards typically earn minimal interest--less than 3%--that’s still better than giving the money away in the form of fees, she said.

“I agree with [that] conclusion,” Connor said, “but the client is the person who makes the decision here.”